Professional Documents
Culture Documents
Financing Mix
17. The Trade off
18. Cost of Capital Approach
19. Cost of Capital: Follow up
20. Cost of Capital: Wrap up
21. Alternative Approaches
22. Moving to the optimal
Financing Type
23. The Right Financing
Investment Return
14. Earnings and Cash flows
15. Time Weighting Cash flows
16. Loose Ends
Dividend Policy
24. Trends & Measures
25. The trade off
26. Assessment
27. Action & Follow up
28. The End Game
Valuation
29. First steps
30. Cash flows
31. Growth
32. Terminal Value
33. To value per share
34. The value of control
35. Relative Valuation
First
Principles
3
Maximize the value of the business (firm)
The return
should reflect the
magnitude and
the timing of the
cashflows as welll
as all side effects.
The optimal
mix of debt
and equity
maximizes firm
value
How much
cash you can
return
depends upon
current &
potential
investment
opportunities
Value of growth
The future cash flows will reflect expectations of how quickly earnings will grow in the future (as a positive) and how much
the company will have to reinvest to generate that growth (as a negative). The net effect will determine the value of growth.
Expected Cash Flow in year t = E(CF) = Expected Earnings in year t - Reinvestment needed for growth
Cash flows from existing assets
The base earnings will reflect the
earnings power of the existing
assets of the firm, net of taxes and
any reinvestment needed to sustain
the base earnings.
Steady state
The value of growth comes from
the capacity to generate excess
returns. The length of your growth
period comes from the strength &
sustainability of your competitive
advantages.
Equity
ValuaFon
6
CF to Equity t
(1+k e )t
t=1
Value of Equity=
where,
CF
to
Equity
t
=
Expected
Cashow
to
Equity
in
period
t
ke
=
Cost
of
Equity
Firm
ValuaFon
7
CF to Firm t
t
t=1 (1+WACC)
Value of Firm=
where,
CF
to
Firm
t
=
Expected
Cashow
to
Firm
in
period
t
WACC
=
Weighted
Average
Cost
of
Capital
7
Favored Tools
- Accounting statements
- Excel spreadsheets
- Statistical Measures
- Pricing Data
Favored Tools
- Anecdotes
- Experience (own or others)
- Behavioral evidence
A Good Valuation
The Numbers People
Illusions/Delusions
1. Precision: Data is precise
2. Objectivity: Data has no bias
3. Control: Data can control reality
Illusions/Delusions
1. Creativity cannot be quantified
2. If the story is good, the investment will be.
3. Experience is the best teacher
10
Task
Make
a
judgment
on
whether
you
want
to
value
just
the
equity
or
the
operaFng
assets
of
your
company.
11
Read
Chapter
12